Summary report on the judicial practice relating to non-compete agreements

Under a non-compete agreement, the employer may restrict the ex-employee’s business activity for a period of maximum 2 years following the termination of employment and in exchange, the employer shall pay adequate compensation to the employee – the amount of which may not be less than 1/3 of the base wage due for the same period. The Hungarian Supreme Court (Curia) published in September 2019 a report on the judicial practice relating to non-compete agreements, which highlights the following findings:

It is usually stipulated in the non-compete agreements that the employee may not enter into employment relationship with a company which can be deemed as the employer’s competitor. According to the summary report, from the fact that according to the company register the two companies carry out the same activities, it might be implied that they are competitors; however, there is still a room for the employee to prove that at the new employer he actually performs completely different tasks in a different field; therefore, he did not breach the non-compete agreement.

According to the judicial practice, the amount of compensation payable to the employee in exchange for the non-compete obligation must reflect the severity of the restrictions imposed on the employee’s activity. When assessing this criterion, the age and qualifications of the employee, as well as the labour market in the given location must be taken into account. Furthermore, the compensation might not be included in the employee’s salary and it might not be a remuneration in kind.

If the right of withdrawal is included in the non-compete agreement, the parties are entitled to withdraw from it before the termination of employment. This practically means that the other party should receive the declaration of withdrawal on the date of termination of employment at the latest. According to the report, the courts also made it clear in several decisions that if the parties terminate the employment relationship with mutual agreement and declare that they have no claims against each other, it does not mean that they withdraw from the application of the non-compete agreement set out earlier in the employment contract.

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